23 July 2001 External T.I. 2001-0073505 - DISPOSITION OF LIFE INSURANCE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether a disposition occurs when a life insurance contract is split into two.

Position:

It is a question of fact whether the variation of the original policy constitutes a partial disposition or is so fundamental as to cause a disposition of the entire policy, including the part of the contract retained by the taxpayer. Where the result of the transaction is that a new policy is created it would not seem arguable that an interest in the existing contract has been transferred to the owner of the new policy.

Reasons: See document.

XXXXXXXXXX 						2001 - 007350

July 23, 2001

Dear XXXXXXXXXX:

Re. Splitting Life Insurance and Segregated Fund Annuity Contracts

This is in reply to your letter of March 6, 2001, wherein you requested our views as to whether or not a disposition occurs when a life insurance or non-registered segregated annuity contract are split in the circumstances described in your letter.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Further, it is a question of fact whether a change to the terms and conditions of a life insurance or segregated fund annuity contract will result in a disposition of the contract. Such a determination can only be made on a case by case basis and we are therefore unable to provide you with a definitive answer without reviewing the particular contracts and the terms of the proposed transfers. However, we can offer the following general comments that may be of assistance.

You have asked us to confirm that subsection 148(8.1) of the Income Tax Act applies in the situation where a life insurance contract owned by one spouse (for example, the husband) is "split into two parts" as a result of a marriage or common-law partnership breakdown. In the absence of specific facts relating to this transaction it is difficult to speculate as to the application of subsection 148(8.1) in the circumstances. Subsection 148(8.1) applies where an interest of a policyholder in a life insurance policy is transferred to the policyholder's spouse or common-law partner or former spouse or common-law partner in settlement of rights arising out of their marriage or common-law. We do not believe that this provision applies in the situation where a life insurance contract is "split" because a "transfer" of an interest in a life insurance policy cannot be said to have occurred when the result of the proposed transactions is to create a new life insurance policy. The policy that the wife will have an interest in will be a new policy and not one that has been transferred to her.

Further, the husband may realize taxable income if it is determined that a disposition of his interest in the policy has occurred even if the only change to the policy will be a reduction in the death benefit (the owner and life insured remain the same). It is a question of fact whether a change to the terms and conditions of the policy will result in the acquisition of a new policy. In the absence of a review of the actual changes to the policy, we cannot advise whether a disposition of the husband's interest will be considered to have occurred. With respect to the question of the date of issuance of the new contract for the purposes of determining their exempt status, in our view the wife's contract will be considered to have been issued on the date of creation of the new contract.

You have also asked us to confirm that when an annuity contract with an underlying interest in a related segregated fund trust is "split" for the purpose of a donation to a qualified donee for the purpose of subsection 38(a.1) no disposition occurs and that the donation will result in a capital gain which will qualify for the reduced inclusion rate. Again, in the absence of specific facts relating to this transaction it is difficult to speculate as to the application of paragraph 38(a.1) in the circumstances. Paragraph 38(a.1) applies where an interest in a related segregated fund trust is gifted to a qualified donee within the meaning of subsection 149.1(1). We do not believe that this provision applies in the situation where an annuity contract is "split" for the purpose of gifting part of the contract.

In our view, if the result of the proposed transaction is the creation of an entirely new contract and at the same time to amend the original contract, at the very least the creation of the new contract results in a partial disposition of the interest, whether the owner and annuitant remain unchanged or the new owner of the new contract is a registered charity. It cannot be said that a transfer of property within the meaning of a gift has occurred with respect to the existing contract when the result of the proposed transaction is that the registered charity will have an interest in a new contract.

Further, it is a question of fact whether the variation of the original segregated fund contract constitutes a partial disposition or is so fundamental as to cause a disposition of the entire contract. In the absence of a review of the actual contracts, we cannot advise whether a disposition of the entire policy will be considered to have occurred.

While we hope our comments are of assistance to you they do not constitute an advance income tax ruling and therefore are not binding upon the Department in respect of a specific situation.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch